IAG deal has curious logic

It’s a curious logic that supposes that because the big four banks are banned on competition grounds from buying what was Australia’s sixth-largest wealth manager, they would stand a chance of buying Australia’s second-largest insurer.

Competition concerns are one of the reasons a takeover by
Commonwealth Bank of Australia
of
Insurance Australia Group
, as mooted yesterday on the account of long-time IAG bugbear
Richard Talbot
, won’t happen. An even better one is that such a takeover doesn’t make much sense.

There may be attractive oligopolistic profits to be made from IAG – together with Suncorp it has the general insurance market tied up – but it’s a domestic focused business with limited growth prospects.

CBA’s own insurance business is not big enough to extract meaningful synergies. The premium the board would demand to approve the takeover – and board approval would be essential given the number of IAG’s retail investors – would likely be a killer.

There are also capital issues – banks are looking for capital-lite businesses to grow into and insurers are capital heavy.

Moving away from capital heavy businesses, of course, was one of the reasons National Australia Bank tried to buy Axa Asia Pacific Holdings, which is the sixth-biggest player in all of its markets. That deal was knocked back by the competition regulator, which would almost certainly do the same faced with a major bank tilting for IAG.

CBA yesterday appeared to be fairly definitive saying it has never had any interest in buying IAG.